Achieving nature-positive impacts: taking a value chain approach

This article was co-authored by Jorn Struwe and Holly Metcalfe , with input from Miguel Castillo , Madeleine Deacon and Andrea Von .

The interplay between business, nature and biodiversity has long been a one-sided relationship that prioritises economic productivity over ecosystem integrity and quality of ecosystem services; leading to ecological damage and biodiversity loss. A number of recent developments, including the development of the Taskforce for Nature Related Financial Disclosures (TNFD) and the agreement of the Global Biodiversity Framework (GBF) in late 2022 means that this is now starting to shift.

The World Economic Forum’s Global Risks Report 2023 identified the natural resource crisis and large-scale environmental damage within the top 10 risks over a two- and 10-year period. Importantly, biodiversity loss and ecosystem collapse are ranked as the fourth most severe and likely risks over the 10-year period. This means that businesses are going to face increasing fluctuations in the availability and cost of raw materials, as well as greater vulnerability in the face of disease, shortfalls in labour force, and other productivity losses. This is by no means news. Global business models have long treated finite natural capital as infinite, thereby undermining the very foundation that enables this economic activity to begin with.

There is an increasing expectation from investors, governments and society that business is accountable for their impacts on nature and biodiversity. Due diligence on value chain nature risks can help businesses identify, assess, manage and disclose their nature-related risks. Due diligence will also enable businesses to identify and communicate opportunities to protect and restore ecosystems and biodiversity.

The starting point for undertaking value chain due diligence is the same for all organisations – understanding your value chain (i.e., value chain transparency) and where and how the value chain has impacts and dependencies on nature.

The relationship between business, biodiversity and nature

Natural capital is essential for global businesses in most sectors of the economy, with over half ($44 trillion) of global gross domestic product reliant on nature and its services. Nearly 40% of Australia’s GDP has a high and very high direct dependence on nature, with agriculture, construction, manufacturing, mining and energy as the most exposed industry sectors.

Unsustainable practices and the scale of economic production are grounded in industrial processes that seek to maximise economic returns. This undervaluing of ecosystem services leads to overconsumption of terrestrial and marine resources beyond the planet’s ability to replenish them.

Healthy ecosystems provide humanity with a vast range of crucial services, many of which are irreplaceable. These include, for instance, provisioning services (food, fresh water, fuel, pharmaceuticals, etc.) or regulating services (climate regulation, erosion control, water purification, pest control, soil health, etc.). These ecosystem services underpin our global economy , generally off our balance sheets, unnoticed until they disappear.

The human economy is embedded in the biosphere, and nature loss or species extinction events do not equate simply to a company or portfolio going out of business. Whenever, an ecosystem or species population is lost, a unique asset has been lost for which there is no replacement.

An example of where the impacts of nature loss can be most acutely felt is within the global food system. Over 75% of global food crop types are dependent on insect pollinators which are being threatened by habitat loss and climatic changes . This type of disruption has a direct consequence for crop yields, impacting food production and ultimately, food security. Further and continued disruptions to animal pollination might incur a domino effect with the potential to disrupt entire supply chains from food processing to distribution through retailers, all the way through to consumers. These types of impacts could be attributed to reduced supplies of raw materials (due to limited crop yields), impacting availability and the cost of resources.

The links between biodiversity, human health and wellbeing further accentuates the resounding impacts of nature loss. The COVID-19 pandemic disrupted the way businesses operate and called attention to how much we depend on nature for our overall wellbeing and positive mental health benefits. Biodiversity loss will also impact our ability to rely on wild species for new medicine; this loss and changes in land use are also considered to contribute to the emergence and prevalence of disease outbreaks. Yet, nature-positive impacts are still very much an afterthought for many businesses.

The role of emerging regulatory mechanisms

Emerging regulations such as the Corporate Sustainability Reporting Directive (CSRD) increasingly recognise the role of market forces in the transition to a nature-positive economy. As a result, mandatory due diligence and public disclosure are emerging as key mechanisms to hold businesses accountable for their impacts on nature and biodiversity.

Notably, the European Union is paving the way to adopt regulatory frameworks to reverse and halt biodiversity loss. As part of the Green Deal, for instance, the European Union announced the EU Regulation on deforestation free products and supply chains . It establishes obligations for companies to verify (so-called ‘due diligence’) that goods sold in the European Union have not been produced on deforested or degraded land.

The adoption of the Post-2020 GBF , which includes four goals and 23 targets, at the 15th Conference of Parties to the UN Convention on Biological Diversity provides a way forward for public and private organisations to address nature and biodiversity loss. Specifically, the targets within the GBF emphasise the importance of collaboration between governments, societies and the private sector to reframe the understanding of the value of nature by recognising the cost of inaction.

Bringing nature and biodiversity to the centre stage

Risk-based due diligence

The biodiversity and climate crisis demands a new paradigm on how to assess and manage physical and transitional risk. Like climate change, biodiversity loss is an ongoing event, happening in real time. Not a potential event far off in the future. There is uncertainty regarding how these processes may play out, and how far-reaching financial impacts will be, but business as usual is not a viable option.

While public reporting and disclosure mechanisms will help pave the way, these mechanisms must be treated by businesses as the bare minimum and not the solution. Risk-based due diligence can help buttress the necessary change we need to see materialise on a global scale.

Risk-based due diligence is one of the most effective ways to control risks of adverse impacts in complex global value chains. At its core, risk-based due diligence is about identifying existing and emerging risks and creating interventions or controls to reduce the likelihood of negative impact.

Historically, due diligence was legislated in a financial context and focused more on risks such as bribery, corruption and fraud. These days, due diligence is emerging in the context of international supply chains and with a focus on human rights and environmental conservation and restoration.

Supply chain due diligence essentially consists of a three-step process:

1. Collect relevant information about commodities and products necessary to map supply chains and to enable transparency up to the point of origin.
2. Analyse and evaluate risks in supply chains and production units. This should include inherent risk assessment at geographical, sector and industry level as a starting point and cumulate in residual risk assessment at individual producer or supplier level.
3. Implement intervention measures to avoid or mitigate risk at producer or supplier level. This may include requiring further information or documents, earth observation, field audits, isotope testing, capacity building of suppliers, engagement in collaborative approaches.

Public reporting and disclosure

The Taskforce on Nature-related Financial Disclosures (TNFD) Framework will enable corporates and financial institutions to identify, report and act on nature-related risks and opportunities within their operations and throughout value chains. While the final TNFD Framework is expected to be released in September 2023, the Beta version has gained significant momentum in the market and is expected to follow a similar trajectory as the Task Force on Climate-related Financial Disclosures (TCFD) Framework.

Transparent and sustainable supply chains will become the fabric of a nature-positive economy through mapping, managing and disclosing businesses’ impacts and dependencies on nature. Importantly, a nature-positive economy starts with businesses being accountable to mitigate nature-related risks and promote nature-positive impacts associated with their operations.

The TNFD Framework outlines a four-step approach (Locate, Evaluate, Assess and Prepare (LEAP) ) that businesses should implement for disclosing key nature-related risks and opportunities as well as material impacts and dependencies with nature.

1. Locate your interface with nature: Analyse your business footprint and identify priority locations and biomes / ecosystems. Dependencies, risk and opportunities to reverse or halt biodiversity loss are unevenly distributed in value chains. They are usually higher during (raw material) production and primary processing, transportation or disposal stages in comparison to assembly or distribution stages.
2. Evaluate your dependencies and impacts: Identify your dependencies and impacts at priority locations at the level of business operations and environmental assets or ecosystem services.
3. Assess your risks and opportunities: Identify the corresponding risks and opportunities for your business. Which risks and opportunities are material and should be disclosed?
4. Prepare to respond to nature-related risks and opportunities and report: Set targets and KPIs, and disclose in annual reporting.

Importantly, the TNFD Framework and the LEAP approach should be applied to immediate operations as well as upstream activities.

The bottom line

As we find ourselves on the precipice of a sixth mass extinction, it is imperative that businesses appropriately incorporate due diligence and public reporting and disclosure into their business models and value chains to reverse nature and biodiversity loss.

The onus of nature conservation and restoration does not rest with the public sector anymore, but with businesses as main actors and innovators.

By considering the main drivers for nature and biodiversity loss and implementing environmental due diligence and LEAP approaches in their supply chains, businesses can identify and communicate opportunities to protect and restore ecosystems and biodiversity with clear competitive advantages.

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.